Now, I want to talk about wealth and poverty because it's coming to a head these days. The concern that people feel about inequality is increasing dramatically. The current election in the United States has on both the right and the left, people whose prominence seems to stem from some resentment about inequality. There was a recent study in which just reported in The New York Times yesterday by David Autor at MIT and his colleagues that looked at polarization by state in politics and compare that with loss of jobs in economics. And they find that the states with a lot of people have lost jobs to globalization or automation, tend to also be states where polarization in politics is the highest. So it's suggesting that what's happening now in politics is not independent of rising inequality, it's predictable. So I think part of the problem here is that we haven't democratized finance, that is we haven't dealt with the risks that people face. They talk a lot about, for example, in rural areas there will be a factory set up, and people buy their homes adjacent to a isolated factory that was put there because the people there were low wage and so there was a benefit to hiring there. But now you have a community built around a factory. Then they find, the business finds that it can get an even lower wage in some less developed country so they shut down the factory and leave. The people who were there, unfortunately, didn't have financial contracts to protect them against that risk. So when the factory shuts down, not only do you lose your job, but you lose your house because the house isn't worth anything anymore. People only wanted houses there because there was this factory employment there. I may be giving an exaggerated situation, but people weren't advised about this. You shouldn't buy a house next to this factory because you're staking everything on the success of this factory. They could have just rented. So we could have democratized finance and prevented these things somewhat by just giving a subsidy to financial advisers. It's something I advocated in my in my books. The government already subsidize financial advisers by giving a tax break. If you hire a financial adviser, and you pay that person for the advice you can deduct that payment from your income taxes. However, that only benefits you if you're high income. Most low-income people don't even itemize so they would never did that and never get any break from it. So their government is subsidizing financial advice for wealthy people and not for poor people. But for people who took that job next to a factory should have been told very simple, "Don't buy, rent." That means that you are not taking the risk of putting of your own home value collapsing along with your wage. That would be common sense, but people who don't have advisers are not aware of these risks and don't think about them. So, most people don't buy financial advice because it's expensive, and they feel that they can't afford it. There's also "What you see is all there is" effect, that kahneman and tversky. People tend to assume that they have the evidence. They talk to their neighbors, they think that it's a smart thing to buy a house next to a factory that in otherwise farmland, and they also have these common ideas that home prices always go up, and homes is a great investment. I know that people think that, but it's naive to think that. You have to think like a trained financial adviser to get the prospects for the value of a home. So poverty is substantially due to unmanaged risk. And one of the most important things we can do for inequality is to make the risk better... is to make risk management better. Wealth and monuments. We are standing right now in a monument to Mr. Zhang in China who was educated here at Yale, and donated money to build this auditorium. And I have another example of a-- it's a little bit-- I think we have to thank him for doing this. He actually did this as a young man. Usually monuments get built at the end of one's life. So this is a more typical example, JP Morgan was one of the, maybe the richest man in America, and he built his house in Manhattan at 36th & Madison avenue. And he built it between the years 1906 and 1910. There it is. Nice house. On prime land, by the way, right at the center of Manhattan. That's the interior. That's the library. Pretty nice. But he only lived there for three years. What is it, it's a museum now it's for you. You can go visit it. They just did a renovation there. This is what happens that people accumulate wealth throughout their life and it ends up being disbursed somehow, one way or another. What do you do with this? After JP Morgan dies, what do you do with this house? It just seemed logical, it should be a museum, and there it is. You can go and visit it. So, there is though something about allowing people to take risks and make money, and the result is a more lively society at the expense of a more unequal society. So the study that I'm referring to here looked at the primitive societies, and found that some societies are less focused on dealmaking and wealth accumulation, of those that are though, have more inequality and more wealth as well. So it's not just modern capitalism that has this dilemma about dealmaking spurs wealth, but it also makes it somewhat unequal in distribution. This unequal distribution of wealth is probably less important in an advanced society that is not close to the threshold of starvation because you don't need all that money to live well.
